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Posted: February 8, 2007

The weird world of exchange-traded nanotechnology funds

(Nanowerk News) An article ("The Weird World of ETFs") in today's Business Week deals with some of the most exotic exchange-traded funds. One of them is the Powershares Lux Nanotechnology Portfolio.

Quote from the article:

"Fast-growing Wheaton (Ill.)-based PowerShares has contributed its share of today's vast pool of niche-oriented ETFs. Since being acquired by Amvescap (AVZ) early last year, the company has nearly doubled its ETF lineup, from 36 to about 70. Many of those funds, such as PowerShares Lux Nanotech Portfolio, focus on such narrow slivers of the market that they could be unduly risky for most investors.

Some nanotechnology stocks could certainly thrive in the future, but for most of us the potential volatility may not be worth it. "Focusing on these industries in one fund is a rather perilous course," says Morningstar (MORN) ETF analyst Dan Culloton. "They're going to be very volatile, because not all of these firms are going to survive."

Culloton says industries like nanotech can be so narrow that ETFs tracking them must buy some unlikely stocks to fill out their portfolios. For example, PowerShares Lux Nanotech's holdings include such household names as Toyota Motor (TM), IBM (IBM), Hewlett-Packard (HPQ), Intel (INTC), 3M (MMM), and General Electric (GE). Such blue-chips could decrease the ETF's aforementioned volatility, but they mean investors aren't exactly getting a pure nanotech play.

Furthermore, the stocks such funds invest in might not even be the ones that ultimately profit from new technologies, Morningstar's Culloton notes. In The Future for Investors, Wharton professor Jeremy Siegel writes that companies that benefit from technological advances usually tend to be big, boring ones, not necessarily those laying the wires and expanding the networks. "That's an important thing for investors to remember," Culloton says.